Expatriation Tax Forms: It Could Probably be Worse

Do you enjoy filling out complex and technical federal tax forms under penalty of perjury, the consequences of which can follow you for decades? If so, you will relish the experience of renouncing your U.S. citizenship.
Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "Act") added sections 877A and 2801 to the Internal Revenue Code (“IRC”) with respect to individuals who relinquish U.S. citizenship or cease to be lawful permanent residents of the United States on or after June 17, 2008.

Section 301(e) of the Act also amended IRC 6039G to require any individual to whom IRC 877A applies, known as a covered expatriate, for any taxable year, to provide a statement that includes details of the individual’s income, assets, and liabilities.

The following represents a cursory glance of the seminal forms involved in renouncing US citizenship or long-term resident service.

Income Tax Returns

For the year in which expatriation occurs, a covered expatriate must file a dual-status return if he or she was a U.S. citizen or long-term resident for part of the taxable year which includes the day before the expatriation date. A dual-status return requires the covered expatriate to file not only a Form 1040, but to attach with it a Form 1040NR as a schedule.[1]

Subsequent to expatriation, a covered expatriate must file Form 1040NR in conformity with Treas. Reg. §1.6012-1(b). However, no Form 1040NR is required if payments to the covered expatriate are subject to full withholding at the source for a particular taxable year, and he or she has no income effectively connected with the conduct of a trade or business in the United States for that year.[2]

Form 8854

All persons who relinquish their U.S. citizenship or long-term resident status must file Form 8854, which certifies, under penalty of perjury, that they have complied with all federal tax laws during the five years immediately preceding the year of expatriation. Persons who fail to provide such certification will be treated as covered expatriates within the meaning of IRC 877A(g), whether or not they also meet the tax liability test or the net worth test. Future blogs will provide insight into the consequences of the “covered expatriate” classification, and the associated tax liability and net worth tests.

Form W-8CE

Not everyone has to file this form. Covered expatriates must file Form W-8CE with the payor of a deferred compensation item, a specified tax deferred account, or an interest in a nongrantor trust by the earlier of the day prior to the first distribution on or after the expatriation date, or 30 days after the covered expatriate’s expatriation date as defined in section 877A(g)(3)).[3]

With respect to ineligible deferred compensation items described in Notice 2009-85, Form W-8CE provides notice to the payor that the individual is a covered expatriate who is treated as receiving an amount equal to the present value of his or her accrued benefit on the day before the expatriation date.[4]

In the case of an interest in a nongrantor trust of which the covered expatriate was a beneficiary on the day before the expatriation date, Form W-8CE provides notice to the trustee that the individual is a covered expatriate.[5]

A trap for the unwary - the covered expatriate will be deemed to have waived treaty benefits with respect to future distributions from a nongrantor trust unless a box is checked on Form W-8CE certifying that he or she will elect on Form 8854 to pay tax currently on the value of his or her interest in the trust…AFTER he or she requests a letter ruling from the IRS as to the value of his or her interest in such trust. Quite an onerous requirement, however, the value realized from not waiving treaty benefits could be substantial.

The expatriation process requires the completion of numerous complex forms involving tax elections and technical reporting disclosures. The consequences of the elections and disclosures made in these forms can (and almost certainly will) follow the expat for decades. Whatever you do, get professional help with these forms.

— by Michael S. Cooper, Esq., Barnes Law

Michael S. Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.